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What Is Customer Equity?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 13 October 2014
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Customer equity represents an attempt by businesses to measure the worth of all of their customers throughout their lifetimes. A company that establishes a strong customer base and builds a strong relationship with that base is poised to do well in the ultra-competitive modern business world. This approach represents a shift in thinking away from marketing strategies that are focused on the products that a company sells. The three main prongs of the customer equity approach are measuring how much value a customer perceives he receives from a company, assessing how much a company's brand resonates with a customer, and determining how well the company retains customers throughout their lifetime.

In the modern business world, creating a new approach to developing business is a difficult task. Most attempts to try and shine a spotlight on the products or services that a company offers have been tried many times over and may not impress customers anymore. As such, many companies instead start with the customers, developing a relationship first before trying to push their products. The worth of the customer base a company has built to the company represents its customer equity.

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Value equity is the first part of the three-tiered approach to customer equity. A customer is likely to return if he feels that a certain product provides him with some sort of value greater than what he can find elsewhere. Some companies may enhance value equity by emphasizing its low prices compared to competitors. Others may instead focus on the reliability of their products, because customers would gain value from having products that last longer.

Brand equity is a part of the customer equity approach that has been emphasized a great deal in the modern business world. With computer applications and technological advances increasing the amount of advertising avenues that a company may pursue, consistency of message is absolutely paramount to breaking through to customers. A customer should know what to expect from a product simply by knowing that a certain company is associated with it.

Retention equity is the final piece of the customer equity puzzle. A customer becomes worth exponentially more to a company if he keeps returning throughout the course of his lifetime. For that reason, it is crucial that companies find ways to not only lure customers, but also to keep them coming back for more. Marketing and promotional strategies that develop strong customer relations can be an efficient and effective way of increasing bottom lines.

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comfyshoes
Post 3

@BrickBack- I agree with you and I wanted to say that it is important to focus building your business based on developing higher customer service levels and developing a customer retention strategy because chances are that your product or service is sold by so many competitors that building customer relationships is what is going to make the biggest impact on your business because happy customers continue to come back and even offer referrals and word of mouth testimonials that should really help your business grow.

I remember when I went on a cruise a few years ago. I was so impressed with the level of service because I have cruised just about every possible cruise line, but this one stood out. They offered so many amenities on their ships and gave generous discounts for those passengers seeking to board another cruise with them. They also identify their best customers with different colored room keys so that regular passengers would know that they were special.

I know credit card companies also do this and it is also a cheap way for a company to distinguish between a regular and a loyal customer because everyone wants a little recognition.

BrickBack
Post 2

@Moldova -I think it is smart to know as much as you can about your customers because when you do you will be able to cater to them in a way that makes the most sense. They always say that it is much harder to obtain a new customer than to retain the current ones, so spending time learning about your actual customer’s spending habits pertaining to your business can give you an idea of what types of additional perks that they should receive.

For example, my husband is a frequent business traveler so the airlines not only allow him the opportunity to accumulate frequent flyer miles for his own personal trip, but they offer a lounge in the airport in which he can relax and have some complimentary snacks and drinks and even shower if he wants. He also gets priority check in and boarding and his luggage is among the first to come out at the baggage claim area.

I think that little things like this really make a difference and create a lifetime customer because the levels of service are so high.

Moldova
Post 1

I think that it is important to determine the lifetime value of a customer and develop customer service strategies to continually meet the needs of these customers. A lot of companies compile information obtained from their accounting department to really measure what are the actual costs to obtain a new customer and what the actual value of a lifetime customer is.

For example, if you have a mail order company you would find out how much the average customer spends and how often they order from the catalogue. Based on the answers you can determine not only your gross margin, but your actual profits on an average customer.

This is really a customer equity example that determines the value of an existing customer. You could really do the same calculations with the longer term or lifetime customers in order to determine their true monetary value.

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